New Delhi: India may lose the “fastest growing major economy” tag to China in 2016-17 with the International Monetary Fund (IMF) downgrading India’s growth forecast for the year by a full percentage point to 6.6% on the back of economic disruption caused by government’s move to demonetise high-value currencies.
In its update to the World Economic Outlook (WEO) released in October, IMF said India is likely to grow at 6.6% in 2016-17 against its earlier estimate of 7.6%. China’s growth during the same period has been increased to 6.7% from 6.5% projected in October due to “expected policy stimulus”. For most economies, IMF makes forecasts on calendar year basis while for India, it follows the fiscal year (April-March).
India’s economic growth is likely to decelerate to 7.1% in 2016-17 from 7.6% the previous year, chiefly due to an industrial slowdown, the statistics department said earlier this month, sidestepping the possible impact of demonetisation.
IMF also expects India’s growth to pick up at a slower pace in 2017-18 at 7.2% against its earlier estimate of 7.6%.
“In India, the growth forecast for the current (2016–17) and next fiscal year were trimmed by one percentage point and 0.4 percentage point, respectively, primarily due to the temporary negative consumption shock induced by cash shortages and payment disruptions associated with the recent currency note withdrawal and exchange initiative,” IMF said in its WEO Update.
Andreas Bauer, Senior Resident Representative of IMF in India said the downgrade for 2016-17 is because growth in the first half of the fiscal year was slower than the Fund’s expectation as well as demonetisation . “We expect the impact of demonetisation will gradually dissipate in 2017-18 and there will be a recovery in economic growth,” he added.
Contrary to IMF’s projection of a recovery, Moody’s and ICRA on Monday said India’s gross value added (GVA) growth at basic prices will further ease in 2017 to about 6.6% from around 7% in 2016 calendar year, with a likely pick-up in the second half of the year, as the economy readjusts after the invalidation of Rs500 and Rs1,000 banknotes.
IMF said while the balance of risks is viewed as being to the downside, there are also upside risks to near-term growth. “Specifically, global activity could accelerate more strongly if policy stimulus turns out to be larger than currently projected in the United States or China. Notable negative risks to activity include a possible shift toward inward-looking policy platforms and protectionism, a sharper than expected tightening in global financial conditions that could interact with balance sheet weaknesses in parts of the euro area and in some emerging market economies, increased geopolitical tensions, and a more severe slowdown in China,” it added.
Moody’s said that after a temporary dampening effect on consumption and investment in the medium term, demonetisation will likely strengthen India’s institutional framework—by reducing tax avoidance and corruption—and should support efficiency gains.
“Even after the currency in circulation is replenished, we expect that India’s economic growth will stabilize with a lag, while remaining strong,” said Aditi Nayar, an ICRA principal economist. “The adjustment and recovery period could stretch to as much as 2-3 quarters for certain sectors.”
ICRA also said that the loss of incomes in some sectors and deferral of consumption are likely to weigh on capacity utilisation, delaying corporate capacity expansion plans.
“And, the extent of capital spending budgeted by the central and state governments for the fiscal year ending 31 March 2018 will affect the extent to which infrastructure spending can stimulate growth in a non-inflationary manner,” Moody’s said.
“Nevertheless, economic and institutional reforms already introduced and potentially forthcoming, continue to offer a reasonable expectation that India’s growth will outperform that of its similarly rated peers over the medium term, and that the country will achieve further improvements in its macroeconomic and institutional profile,” William Foster, a Moody’s vice-president and senior credit officer, said.
On the fiscal front, Moody’s said that the government will likely remain committed to achieving its fiscal deficit target of 3.5% of the gross domestic product (GDP) for the year ending 31 March.